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Saturday, 16 March 2013

The Problem with Tax

We all know what tax we have to pay and when. You might not know how much tax you're paying exactly, but you know that you pay tax on your income, on the stuff you buy, and to put your car on the road.

We don't really like paying it. There's a feeling - even if that feeling is unjustified - that the money you pay doesn't get spent wisely, or you put more money in than you benefit from; but at least you are able to plan your finances based on your expected income.

When you have an unexpected expense then hopefully you have insurance to cover it, you at least have the opportunity to buy insurance before the event. All of these things are known variables. So when your government decides that they are going to tax your savings at up to 10% without any warning, you're probably going to be angry.

Cyprus have announced, as part of a bailout from the eurozone, a levy on all savings of 6.75%, or 9.9% for those with savings above €100,000. OK, so everyone is effected in the same way, but it's pretty annoying to say the least. It's thought that almost half of all deposits in Cypriot banks are from Russians, able to deposit in Euros but not face the tax on the interest or even particularly high currency conversion rates. Those effected by the levy will receive the equivalent amount of shares in their bank.

The fear is that those depositors will withdraw their money and take it to another country, which shows a major problem with the way the Cypriot economy was being run, effectively having the capital in their banks in the hands of foreign investors. The amount of money from those investors would be fiscally insignificant in Germany, France, or the UK, but in the third smallest economy in the eurozone the problem is very real.

The calculation from the other eurozone countries is that the foreign investors will see the cash to share conversion as a reasonable investment to keep hold of - the risk of losing that money being much less after a bailout, and the recapitalization from the levy itself - but the confidence will only continue if the eurozone gets on with getting some growth back pretty sharpish!

So the problem with tax is the more you have to pay, the less likely you want to pay it, and when it comes unexpectedly you get very angry indeed. Of course the government would rather you spent the vast majority of disposable income and not stick it in a sock under your bed ... because then they get more tax from it (and they economy is more likely to grow)! Perhaps that's a motivation also?!